FOMC Announcement

Economic growth so far this year described as considerably slower than expected.

No threat from inflation seen in near term forecast.

No mention of recent financial market distress due to U.S. credit downgrade.

Three dissents mark the end of a unified FOMC.

In today’s policy announcement the Federal Reserve committed to keep the Fed Funds rate near zero at least through mid-2013. Thus the so called “extended period” has been set in stone for no less than another 22 months. The FOMC acknowledged that economic growth so far this year has been considerably slower than they had expected and that downside risks to the economic outlook have increased. The outlook for inflation remains subdued according to the Fed. With a tame inflation outlook but increasing downside risk, the FOMC collectively felt there was room to make monetary policy more accommodative without committing to another round of large scale quantitative easing. However, the Fed will maintain its current policy of reinvesting principal payments from its securities, meaning that the balance sheet will not erode and they will maintain a slow drip of additional easing. The FOMC did not explicitly identify any other potential policy tools in its announcement, but it did say that it is prepared to employ additional tools as appropriate. In essence, the FOMC is collectively holding its breath to see if job growth resumes. If not, we can expect more actions this fall, possibly including another round of large scale quantitative easing. There were three dissenting votes against today’s policy action: Fisher, Kocherlakota and Plosser. These dissents break the recent string of unanimous votes and indicate a more contentious and divided FOMC, uncertain of how to respond to an increasingly challenging economic environment.

Market Reaction: Equity markets are showing some gains following the FOMC announcement. However, Treasury yields are falling. Gold is up to $1767 an ounce. The dollar is giving ground against the yen and the euro.